Yukos returns to haunt Russia

December 1, 2009

wwwreuterscomyukos— Jason Bush is a Reuters columnist. The views expressed are his own —

Former Yukos shareholders are set to sue Russia for up to $100 billion in damages after an international court ruled in their favour. Successful claims against a sovereign state are rare. But the case is embarrassing for Russia. If successful it could even lead to the confiscation of Russian assets.

The biggest problem for the former shareholders of the bankrupt oil group was proving that international courts had jurisdiction in the matter. But they have found an ingenious way to make their case, suing Russia under the Energy Charter Treaty, which protects investors in Russia’s energy sector. Russia signed this treaty, but never ratified it, creating ambiguity over whether it is actually binding.

The answer, according to yesterday’s ruling by the Permanent Court of Arbitration in The Hague, is that it is. That’s extremely worrying for Russia. The legal justifications for its actions against Yukos have long met with widespread scepticism abroad.

The core shareholders’ stake was worth an estimated $25 billion at the time Yukos was dismantled, but the litigants are asking for a multiple of that amount to reflect Yukos’s estimated capitalisation today and interest.

Former Yukos shareholders have already fought successfully in European courts. In April, a Dutch court awarded $389 million in damages to a Yukos affiliate. And in 2007, the Swiss high court ruled that the Yukos case was “political”, rejecting Russia’s request to freeze Yukos assets.

True, there’s little chance of the Russian government actually recognizing any damages claims. The Yukos shareholders have therefore spoken of seizing Russian assets abroad, such as Gazprom’s gas and Aeroflot planes.

The long-running case of Noga, a Swiss trading company that repeatedly impounded Russian assets abroad, suggests that such tactics will be more of an irritant than a serious threat. Like other governments, Russia has cited the widely-recognized principle of sovereign immunity, which protects state property against seizure.

The Yukos case may be different, however. Unlike Noga the former shareholders are suing Russia under an international investment treaty. And some lawyers argue that such treaties invalidate the principle of sovereign immunity.

In 2008 a German investor named Franz Sedelmayer successfully enforced a 4.9 million euro damages claim awarded by the Stockholm Arbitration Court, leading to the confiscation of real estate owned by the Russian government in Germany. Although tiny by comparison with the Yukos claim, the case sets an important legal precedent.

The fight is sure to drag on for many years. But Monday’s ruling shows that no one should underestimate the Yukos shareholders’ legal chances.

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